Dollar Falls as Fed Extends Maturities to Bolster Economy

The dollar fell against most of its major peers after the Federal Reserve said it will extend its monetary stimulus and stands ready to do more to bolster the economy and speed jobs creation.

The 17-nation currency weakened from almost a one-month high as German Chancellor Angela Merkel cast doubt on direct sovereign debt buys, trimming speculation that Greece’s new government signaled progress to contain the bloc’s financial crisis. The U.S. central bank announced plans to continue its program to exchange shorter-term holdings for longer-term debt, while policy makers opted not to undertake additional quantitative easing. The yen weakened versus all of its 16 most-traded counterparts.

“They’re keeping a bullet in the chamber in case things blow up in Europe, which is a very prudent way of handling debt and uncertainty,” said Greg Anderson, a currency strategist at Citigroup Inc. in New York. “If the Fed had used its last bullet in QE3, that would be worrying for the market.”

The dollar fell 0.2 percent to $1.2707 per euro at 5 p.m. in New York. The U.S. currency rose 0.8 percent to 79.54 yen. Japan’s currency fell 0.9 percent to 101.07 per euro.

Fed Moves

The Fed will expand its program to replace short-term bonds with longer-term debt by $267 billion through the end of the year.

The continuation of Operation Twist “should put downward pressure on longer-term interest rates and help to make broader financial conditions more accommodative,” the Federal Open Market Committee said today in a statement at the conclusion of a two-day meeting in Washington.

“Growth in employment has slowed in recent months, and the unemployment rate remains elevated,” the FOMC said. “Household spending appears to be rising at a somewhat slower pace than earlier in the year.”

“The Fed basically went the conservative route extending it,” said Andrew Busch, a global currency strategist at Bank of Montreal in Chicago, said in a telephone interview. “That’s what they had left in the quiver as far as what their short-dated securities were. They certainly didn’t want to take the risk of doing additional quantitative easing purchases due to the fact that they need probably another month’s worth of data to confirm that things are really bad.”

Slower Growth

Central bank officials cut their estimates for 2012 growth after last month’s slowdown in hiring and see little progress on unemployment during the rest of the year.

They lowered their central tendency estimate for U.S. 2012 gross domestic product growth to 1.9 percent to 2.4 percent from 2.4 percent to 2.9 percent in April. Estimates for 2013 centered around 2.2 percent to 2.8 percent, compared with 2.7 percent to 3.1 percent in the previous forecast.

The Fed bought $2.3 trillion of assets in two rounds of stimulus known as quantitative easing between December 2008 and June 2011. The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, lost 14 percent during that period.

The central bank has also kept its benchmark interest rate at zero to 0.25 percent since December 2008.

Norway’s krone rose against all of its major counterparts, appreciating 0.8 percent to 5.8970 per dollar, after the country’s central bank left its main interest rate close to a record low for a second meeting.

Peso Weakens

The Mexican peso fell versus most other major currencies, decreasing 0.2 percent to 13.7092 against the greenback. Mexican central bank Governor Agustin Carstens narrowed his economic growth forecast for this year, saying the country’s gross domestic profit will expand 3.5 percent to 4 percent. The bank forecast 4.25 as the top end growth range on May 16.

Germany’s Merkel declined to commit to direct sovereign debt purchases through the euro-area bailout fund, pushing back on calls by euro-region leaders who backed the measure as a way to ease the debt crisis.

“There is no concrete planning that I know about, but there is the possibility of purchasing sovereign bonds on the secondary market,” Merkel told reporters today in Berlin after talks with Dutch Prime Minister Mark Rutte.

“She’s not saying anything new that we don’t already know,” Citigroup’s Anderson said. “She may be, in some way, trying to remind the market that Europe is not rudderless.”

Antonis Samaras, leader of Greece’s New Democracy party, was sworn in as prime minister after Greek political leaders agreed on a coalition that will seek relief from austerity measures tied to international loans.

In its final statement, the G-20 backed Europe’s plans to consider a more integrated banking industry with common deposit insurance, a step that Merkel has resisted. With attention shifting to a summit of European Union leaders in Brussels on June 28-29, the G-20 supported EU plans for closer economic union “that lead to sustainable borrowing costs.”

The shared currency will finish the year at $1.25, according to the median estimate in a Bloomberg News Survey. The yen will weaken to 82 versus the greenback and the Dollar Index will rise to 82.5, separate surveys show.

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